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Practical steps to effective tax compliance by SMEs

Tax compliance does not have to be a burdensome process for SMEs if they put appropriate policies and processes in place. The policies and processes will also help ensure that they pay the right business taxes, and adequately manage their tax affairs.

For SMEs, an effective bookkeeping system is perhaps the most important requirement for effective tax compliance. It provides the first line of defence, in the possible event of a tax audit. Proper record keeping makes computing/estimating tax liabilities easier as the elements for key accounts are readily available. In addition, it provides proof that transactions claimed actually took place and are not fictitious or a sham. It is not difficult to implement bookkeeping systems as there are several applications that can be used – excel spreadsheets, expense managers, etc – to make this a fairly easy task.

Another recommended best practice is the clear separation of non-business (personal) expenses from business expenses. Though it seems quite basic, failure to inculcate this practice make businesses lose many tax-deductible expenses that would have hitherto reduced their corporate income tax liabilities. Having separate business accounts that are used strictly for business transactions is highly recommended.

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Likewise, there is the need to have basic knowledge of business tax laws, including rules guiding deadlines for filing returns and remitting taxes to the appropriate revenue authorities. This does not require the taxpayer becoming an expert tax professional overnight, he/she only needs to have a good understanding of how the tax laws apply to their businesses. Revenue agencies have made this easy by publishing tax calendars for each financial year to guide taxpayers on their compliance deadlines. Also, they are working on making the entire compliance process automated. A number of tax consultancy firms have written several articles to summarize these tax laws in a manner that is easy to understand and these can prove to be very invaluable tools.

Finally, it is very important for SMEs to stay informed on developments in tax laws and regulations. Revenue authorities and tax consultancy firms regularly publish updates on developments in the local tax regime, and it is recommended that SMEs subscribe to such updates.

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